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Fifteen years ago, online retail sales were more or less zero. Today they are worth almost £70 billion. Far from making room to accommodate the new channel, total floorspace has actually increased a little over the period. Meanwhile, online has progressively cannibalised that footage rather than create new demand. And this cycle continues – online continues to suck business out of stores and add capacity.

Not surprisingly, this has impacted trading economics although it has taken time to really hit. Now we are seeing the implications begin play out in the shape of distress. Admins, CVAs, job cuts etc have become the staples of retail news flow. And most of the narrative around these events and indeed, around the broader industry discourse, focuses on onerous costs and particularly, property. It is certainly true that rental levels are totally unsustainable. Even without going into a process of some kind, retailers are looking to negotiate rental reductions wherever they can.

While rising costs and property prices are undoubtedly pressing issues,  the reality is they are symptoms of a more fundamental issue that goes to the very heart of retail today. Retail is simply not good enough at retailing aka selling. After generations of demand growth in a physically immature industry, we now have saturation in what is to all intents and purposes, a retail recession. Too many players with too much capacity. And this is increasingly exposing deficiencies in so many retail business models.

Reducing costs and rents is important but admins, CVAs, changes in ownership etc are all tinkering at the margins. In themselves, they will not make the business a better retailer. And this is an existential challenge. Unless the word restructure starts to be applied to the top line, not just the cost line, these sticking plasters have zero chance of curing the patient.

** We support retailers and stakeholders with strategic advice. If you think we can help, drop me a line – richard@richardtalksretail.co.uk

This morning’s results from the Partnership were very much as expected. Smart management of expectations should mean that most stakeholders knew what to expect. And the pivotal stakeholders for the Partnership are the partners. Its founder John Spedan Lewis laid down his philosophy nearly 100 years ago. There was much he could not possibly foresee but the Partnership has bust a gut to adhere to his principles ever since. In most respects, his philosophy has been a massive asset. It’s why it not merely different but superior to the majority of its competitors.

At the heart of the Partnership are the partners themselves, Spedan believed that if the business could achieve the happiness of partners, much of the rest would follow. Getting a 3% bonus looks awful when compared with the 20% of 2008. However, this is an unrealistic perspective. In reality the company will never again be able to pay a bonus of that kind. One of the few things we can be certain about is that retail is becoming a progressively less profitable element in the distribution chain. Indeed, many players in that chain are in the throws of a slow, painful death – they no longer pass the test of economic viability.

It is increasingly pointless to judge retail businesses against their own historical performance. None will emerge in good shape. In this long drawn out, painful period the key is to outperform your peer group. That is the only meaningful context and using that fundamental criterion, JLP’s numbers today are OK. Of course they could be better, but probably not much.

The business faces huge challenges. At the heart of these is price and price position. Both brands are middle market players. They both SHOULD be more expensive than those pitched below them. Only one player in any market can be cheapest at any time. The imperative for the ones above is to justify their higher prices through added value. And in JLP’s case, much of this is about partners. John Lewis and Waitrose have a genuine edge in service. Investing in defending and enhancing that edge is 100% right.

** We support retailers and stakeholders with strategic advice. If you think we can help, drop me a line – richard@richardtalksretail.co.uk

This week’s announcement from M&S and Ocado was just the latest in a series of major moves in food retailing. Quite a number of these seem, to me at least, to have been driven more by external considerations than internal ones. This latest development is great for Ocado and its quest to be a tech business rather than a retailer. For Marks, it’s much harder to see the rationale. People rightly say that online grocery is growing faster than physical. But why would you want to chase unprofitable sales, thus diluting your already very low margin food business?

M&S was very keen to highlight the fantastic opportunities it would unlock. Better buying terms through higher volumes. Enabling core M&S clothing customers who want to buy food online the chance to buy M&S, instead shopping elsewhere. Adding Ocado own brand product into M&S stores, creating an entry level offering. However, will lost Waitrose customers be matched or exceeded by gained M&S ones? And in stores, a wider offer will not be easily accommodated in existing footprints. M&S already has long-standing weak food availability, and adding SKUs will pose significant operational challenges in what will remain by far the most important part of the business.

The two parties announced that had the JV been trading for the past year it would have posted sales of £1.5bn and EBITDA of £34m. There was no detail behind this but given that we were also told Waitrose represented 25% of Ocado sales revenue, have they simply assumed M&S will substitute all of Waitrose business ie sales of £367m?

In recent times M&S leadership has emphasised its commitment to building a serious online retail business by adopting the phrase “digital first” to reflect ranging decisions across its clothing will be driven by online. Today, it talked about the same approach in food. I find this worrying. With online clothing sales at just under 19% and M&S/Ocado food (assuming Waitrose’ sales levels as a base) at 6%, this seems like the tail wagging the dog. Indeed, by profit the numbers for physical retail would be vastly more dominant still.

The stock market has marked Marks’ shares down by 12.5%. The dividend cut of 40% on what was once one of the true “blue chip stocks” is symbolic of a company moving away from what used to be its core values.  I share the market’s scepticism.

** We support retailers and stakeholders with strategic advice. If you think we can help, drop me a line – richard@richardtalksretail.co.uk

Three trading weeks into January and most of the Trading Statements are out. It comes as no surprise that we still don’t have a clear view of what happened. The BRC called it the worst Christmas trade seen in 10 years and intuitively, I think this is right. The ONS data today is full of flaws. For example, it says that small retail businesses had a bumper Christmas but large ones struggled. Rather more believably, further analysis of the data shows that while online retail across all non-foods grew 15% YoY, physical retail went backwards by 1.5%.

Looking at the Statements, trading appears to have been rather better than feared. Indeed, it looks a bit better than the headline data from the BRC and ONS. However, I would warn against taking the Statements at face value. Every company uses different criteria, so they cannot be read across from one business to another. Indeed, they cannot always be read YoY for one company.  They are not audited and the numbers, definitions and timeframes can be changed.

A growing variable is returns. As online gets bigger, so returns become a bigger proportion of sales. Given gifting, returns will be even higher than usual. December’s total non-food sales were 29% online against 26% the year before. Virtually no Trading Statement mentions returns. The timing of most Statement meant that the vast bulk of returns would not yet have come through. In other words, effectively retailers reported “gross” sales.

If we want Christmas Trading Statement to be a more reliable barometer of retail performance, they need to be independently audited and regulated with agreed transparent ground rules. Until this happens, large grains of salt are strongly recommended.

One final point about Q1 2019 and judging retail performance. The “Beast From The East” had a massive impact on trading performance last year. The comps are therefore very soft and need to be taken into account. However, in cash terms this will be irrelevant and I suspect many retailers have entered the New Year in a materially weaker cash position YoY.

 ** We support retailers and stakeholders with strategic advice. If you think we can help, drop me a line – richard@richardtalksretail.co.uk

In world of uncertainty, consistency is a haven. And a reliable feature of the retail calendar is Next’s Christmas Trading Statement being greeted as if it represents the industry as a whole. It doesn’t.

This morning’s numbers were solid and respectable. They will look much better as the next few weeks unfold, with the rest of the trading statements demonstrating yet again that Next is atypical. More than half its sales are now online. It only goes on sale seasonally, to clear stock and has avoided the massive damage caused by frequent discounting across the market. The company is better managed than its peers, with tight, consistent leadership. While it might be thought unexciting and a little bland, Next is risk averse and reliable. Over the years, these characteristics have helped to set the company apart.

Overall, the numbers show a continuation of its recent trend where the physical/online split is moving very steadily in favour of the latter. Next’s statement covers the 9 weeks to end December. Online sales were +15.2% and stores down 9.2%. The annualised numbers show this trend accelerated over the period. The company has also lowered its profit guidance for next year, albeit by a modest 0.6%.

Next remains a strong business and these figures reflect this. It has retained brand and price integrity where many of its peers have allowed theirs’ to dilute. This will certainly have helped it trade better than most through this period. The shake out I expect to see unfolding will make room for the better players. Next can more than hold its own and will be a beneficiary.

 ** We support retailers and stakeholders with strategic advice. If you think we can help, drop me a line – richard@richardtalksretail.co.uk